Momentum Crashes

Kent Daniel and Tobias J. Moskowitz

No 20439, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Despite their strong positive average returns across numerous asset classes, momentum strategies can experience infrequent and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in "panic" states - following market declines and when market volatility is high - and are contemporaneous with market rebounds. We show that the low ex-ante expected returns in panic states are consistent with a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of momentum's mean and variance approximately doubles the alpha and Sharpe Ratio of a static momentum strategy, and is not explained by other factors. These results are robust across multiple time periods, international equity markets, and other asset classes.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-ifn
Note: AP
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Citations: View citations in EconPapers (1)

Published as Kent Daniel & Tobias J. Moskowitz, 2016. "Momentum crashes," Journal of Financial Economics, vol 122(2), pages 221-247.

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Journal Article: Momentum crashes (2016)
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